Halifax today halved its forecast for how far house prices will fall this year after reporting a further rise in July as increased demand combined with a shortage of availability continued to support the market.

The lender said it had been surprised by recent price rises, including a 1.1% jump in July which took the average price of a UK home to £159,623 and means that so far this year prices are down by just 0.8%. As such it revised down its forecast for price falls from 15% to 7%.

The lender's monthly snapshot of the housing market showed the three-month figure – a better indicator of underlying trend than one-off monthly figures – was positive for the first time since October 2007 when the market began to go into freefall, with prices up 0.8%.

The annual rate of price falls also narrowed in July to 12.1% compared with 15% in June.

Last year, Halifax predicted a 15% drop in prices over 2009 but today its chief economist, Martin Ellis, said that by the end of the year prices were likely to be down by up to 7%.

"The market has been stronger than we were expecting in the first half of the year," he said. "It has stabilised a lot sooner than we expected – at the end of last year there were signs of very strong falls and these continued into the new year.

"In February and March we were still seeing falls of around 2%, but more recently the market has seemed to stabilise."

Ellis said the speed at which the market seemed to have stabilised was "remarkable", but it could still face "some fairly strong headwinds" in the form of rising unemployment and other economic problems. The appearance of more homes on the market, as would-be sellers and builders grow in confidence, could also put a damper on growth, he said.

On July's figures he added: "Demand for homes has risen, albeit from a very low base, since the start of the year, driven by improvements in affordability and low interest rates.

"Higher demand has combined with the low levels of property available for sale to boost sales activity from exceptionally low levels and support prices over the past few months."

However, anyone who bought a home in the summer of 2008 could be nursing considerable losses – almost £18,000 has been wiped off the average house price since July last year, and if prices do fall by 7% this year they will end the year 26% below the peak they reached in August 2007.

Although the Halifax figure shows that a fall in interest rates has reduced mortgage repayments to their lowest level since mid-2004, with monthly payments accounting for an estimated 21.4% of gross household income (compared with a peak of 26.9% last October), if unemployment continues to rise there could be a glut of homes coming on to the market as homeowners give up struggling to repay their loans.

Further market uncertainty

David Smith, senior partner at property consultancy Carter Jonas, said: "There is a stark shortage of property on the market and this, above all, is driving the rebound we are seeing.

"The worry is that this shortage of property will cause buyers to sit on the fence again, as they will shy away from committing to a purchase at a higher price level and based on lower choice."

Howard Archer, chief UK economist at IHS Global Insight, said he believed house prices were "highly likely" to fall further over the coming months.

"Much will clearly depend on whether or not the economy can return to growth in the near term and then sustain recovery, how much further unemployment rises, how quickly and to what extent credit conditions ease, and how many properties come on to the market over the coming months.

Brigid O'Leary, senior economist at the Royal Institution of Chartered Surveyors, which publishes its latest market survey tomorrow, said increasing buyer demand and low availability meant it was "more likely than not that prices may edge up further in the next few months".

However, she said the market was still in a depressed state. "Economic uncertainty, rising unemployment and continuing restrictions on mortgage finance could all pose significant headwinds to a longer term recovery in both activity and prices."

This morning, Halifax's parent company, Lloyds TSB, reported it had made a loss of almost £4bn in the first half of this year, blaming bad loans made by Halifax and Bank of Scotland for some of its losses.

Meanwhile, Britain's largest housebuilder, Taylor Wimpey, said this morning that trading conditions have improved significantly already this year, with prices nudging upwards in recent weeks.

Chief executive, Pete Redfern, said the company was now in a position to cut some of the incentives it has been offering and push prices higher. The firm also plans to open around 40 sales outlets before the end of this year.